To: Controller of WetWind Alternatives Corp. and Subsidiaries
From: Group 101
Re: Accounting considerations succeeding natural disaster
Guidance has been requested surrounding an event which occurred between the year-end WetWind Alternatives Corp ("WWA") and that of their subsidiaries. This Memo explains the following conclusions:
1 WWA must determine if the current year-end model is preferable.
2 Consistent with their current model, the event would be disclosed by WWA and it's subsidiaries. Elimination of the year-end lag would result in recognition of the event in the current year with appropriate disclosures pertaining to the change in accounting principle.
3 The event disclosed should be classified as an ordinary loss.
1. What factors should be considered when determining a change of the current year-end model?
Factors identified are as follows:
Remaining with the current practice will ensure timely statements
Timely statements impede a degree of reliability
Operating on matching year-ends will result in greater costs and resources to complete financial statements by reporting deadlines
Corresponding year-ends will improve reliability
WWA must determine the cost vs. benefits of timeliness vs. reliability. ASC 810-10-45-11 and ASC 810-10-45-12 permits the use of different year-ends of a parent company and it's subsidiaries providing the difference is not greater than 3 months (93 days per Rule 3A-02 of SEC Regulation S-X).
Remaining with the current model enhances timeliness which is offset by a reduction of detail in the financial information delivered. The current model alludes that it takes significant time (2 months) and resources to close the subsidiaries' year. Since the parent company is not closing their year-end simultaneously, resources are effectively allocated to the subsidiaries. Thus, this approach encourages more economical delivery of timely statements.
Changing the subsidiaries’ fiscal year-end to correspond with that of the parent will enhance accuracy and reliability but at a greater cost. This change demands even greater resources consumed since year-end financial statements of the subsidiaries and the parent company, alongside consolidated statements, would all have to be prepared within the 90-day reporting deadline window as opposed to that just of the parent and the consolidated statements. As stated in ASC 250-10-45-12, "an entity may change an accounting principle only if it justifies the use of an allowable alternative accounting principle on the basis that it is preferable".
Should the client determine to eliminate the fiscal year-end lag by changing the subsidiaries’ year end to correspond with the parent, a change in accounting principle with retrospective application would be appropriate treatment (ASC 810-10-45-13). Change in accounting principle should be disclosed in accordance with the requirements listed in ASC 250-10-50-1.
2. How should the December 13th event be reported in the consolidated financial statements?
(a) Pursuant to current practice.
According to ASC 855.10.25-3, a subsequent event that did not exist as of the balance sheet date and arose before the financial statements would be issued, should not be recognized. The event is referred to as a Type II subsequent event; per ASC 855.10.55-2(d), a non-recognized subsequent event includes, “loss of plant of inventories as a result of fire or natural disaster that occurred after the balance sheet date but before financial statements are issued or available to be issued.” Therefore, the consolidated statements should only reflect subsidiary gains and losses which occurred as of the subsidiaries' fiscal year-end.
ASC 810.10.45-12 and SEC Regulation S-X Rule 3A-02 state that disclosure is required for any intervening event by a subsidiary that materially effects the financial position or results of operations. Therefore, WWA and it’s subsidiaries would be required to disclose the event if it
